After seeing the latest string of events unfold right before our eyes, many are openly pondering whether we may see hyperinflation hit the US shores. But rather than ponder Trump’s latest executive orders or over the top pronouncements, let us first look at what hyperinflation is and how it works.
What Is Hyperinflation?
Hyperinflation is simply inflation that has grown out of control. The phenomenon is brought about by several factors although increased money supply is often the most likely culprit.
Indeed, when monetary supply goes unchecked, the price of basic goods goes up, and the currency loses its value. So, in a nutshell, if the conditions are right out of control inflation really can happen. Interestingly, there are many roads to rapid increases in prices. Let’s take a look.
Other Causes of Rapid Inflation
War is one of the most common causes of hyperinflation. Investors have little confidence in a currency whose country is at war whether the war is political or economic. A loss of investor confidence can cause a rapid drop in currency values. When a currency falls quickly enough, other problems soon arise. Not the least of which is mass bank withdrawals.
Run on Bank Funds. If residents lose confidence in their nation’s paper notes, they often withdraw bank funds en masse. However, this doesn’t just impact the banks, it can tank an economy in a hurry.
Furthermore, given that most banks only keep 5% of their total deposits on-hand, if enough depositors request their funds at the same time it wouldn’t take long before banks run out of cash. As banks rush to sell assets and call in loans held by members, panic would ensue triggering more waves of bank withdrawals. The only way for banks to fulfil requests in such an event is to sell assets, but far below market rates, and this affects both cash and asset values.
Bank Closures. Mass withdrawals eventually lead to bank closures. In the past, this has led to losses so large that anyone who wasn’t quick enough to withdrawal their savings lost everything. Indeed, a similar scenario played out during the Great Depression. And as we know from that bit of history when banks suffer the population experiences even greater turmoil.
Travel throughout the US Grinds to a Halt. Interstate travel is crucial for business. When travel stops for any reason, the business community is significantly affected. Firms that operate in different states may be forced to shut down, and since business is a key economic driver, the effects will be felt immediately.